A long time ago I concluded that John Law's big mistake was not the idea of paper money, which was actually brilliant, but selling, nay, oversubscribing, shares in Louisiana, which was not a worthy place for such confidence, as history has proven time and time again. I say this as someone from Louisiana. Backing money with Louisiana was insane for the buyers, and ultimately, the sellers. An analogy might be China backing money with Tibet, which, of course, they are not crazy enough to do.
A long time ago I hoped to be able to demonstrate this but over time it became apparent to me that I lack the language to support this argument. Economic arguments are required, not just historical observations, and I can't do math, at all.
Then events intervened. I was still full of self confidence on the morning of 9/11/2001. That morning I was opining about my theories on SI when I was interrupted by people telling me about the horrific incidents in NYC and the attack on the Pentagon.
I turned away from my computer, turned on the TV, and became transfixed by the horror. My husband's office was only a few blocks from the Pentagon. I was afraid for his safety, and for the safety of my children.
I completely lost interest in the Great Depression, and have never been able to turn back to it. My research now rests in four banker's boxes in the basement. Sometimes I think about just hauling them to be recycled as mixed paper, but so far I haven't done that.
So, to be honest, I only vaguely remember what I knew then. I now have a full time job as a consumer bankruptcy lawyer, and see firsthand what individuals are experiencing. Perhaps one day I will write a book about the actual victims of unregulated subprime lending in the 21st century.
I pay very close attention to current events, including the current economic crisis. And leave the research ton the last great economic crises and the ones before that to others who have more time and resources, including Ben Bernanke, Christine Romer, and Barry Eichengreen.
Can we generalize from other financial crises to this one? Yes, but nothing more than generalities. Fiat paper doesn't work, it has to be backed. Does it need to be backed by gold or silver at an artificial rate of exchange set by a central bank? Absolutely not, this has been proven repeatedly to be a very bad idea. Can we back money with worthless securities (Louisiana, subprime mortgages?) Absolutely not, this has been proven repeatedly to be a very bad idea. Can the government succeed in telling a banker which loans to make? Absolutely not, this has been proven repeatedly to be a very bad idea.
Backing money is not a science, it is an art. Unbacked money is crazy, once you give the printing press to a government hell is not far away. Nobody can back money but a banker, who is a human being who makes mistakes but has no incentive to screw himself, if nothing else.
If a lender knows, or believes, that the government will bail it out of bad loans, that is tantamount to giving the government the printing press. |
